Malta - 'A' Rating?

Fitch Ratings has affirmed Malta's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A' with a Positive Outlook. Furthermore, the issue ratings on Malta's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'F1', respectively. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign and Local Currency IDRs at 'F1'.

Fitch - Key Rating Drivers

When commenting about Malta’s ratings, Fitch noted that these reflect the high national income per head compared with the ‘A’ median, Malta's robust economic growth and a large net external creditor position. The ratings are constrained by ongoing structural bottlenecks as captured by the weak World Bank Ease of Doing Business indicator

Fitch’s Positive Outlook for Malta reflects the rating agency’s view that the public debt/GDP ratio is on a downward trajectory and that economic growth will keep outperforming similarly-rated peers.

2016 saw Malta’s economic growth remain strong at 3.9% year-on-year over the first three quarters which has been boosted by robust public consumption.

The rating agency forecasted that the “Maltese economy will keep growing at a faster pace than the 'A' median at an average 3.3% over 2017-2018, supported by strong employment growth, rising disposable income due to continuous wage appreciation and the launch of new investment projects in the health, education and transport sectors.” This projected growth is in line with the forecast in the Malta Budget 2017.

Sectorial Analysis

The pharmaceutical, remote gaming, financial services and tourism sectors are expected to experience strong export performance this year. Despite higher import-intensive investments related to the EU funding cycle, exportations from the aforementioned sectors will help Malta maintain a solid current account surplus over 2017-2018. Fitch continued to add that Malta’s external position compares favourably with ‘A’ rated peers with a net international investment position estimated at 47% of GDP at end 2016.

Real GDP growth was revised up by 4.9pp in 2014 and 1.3pp in 2015, following national accounts revisions published by the National Statistical Office in December 2016. This can be attributed to upward revisions to non-residential construction and machinery, as well as service exports particularly from the gaming industry. This result was a substantial improvement in the public debt/GDP ratio and to an upward revision of potential GDP growth to 5.4% in 2016, reflecting higher estimates of total factor productivity.

Fitch has also pointed out that high revenues from excise duties, income tax, and the Malta International Investor Programme (IIP), have helped Malta’s gross general government debt fall to an estimated 59% of the GDP at end-2016 from 60% in 2015. The rating agency is expecting it to further decrease to 56% in 2018, on the back of an improved primary surplus and strong nominal GDP growth, still higher than the 'A' median of 52% of GDP.

With respect to fiscal deficit, Fitch’s estimations fall in line with those of the Malta Budget 2017. It is expected that fiscal deficit shall decrease to 0.5% of GDP from an estimated 0.7% in 2016. “Robust economic growth and additional indirect tax measures will boost tax revenues and offset more moderate revenue from the IIP, increased expenditure related to the EU presidency and lower tax on pensions,” adds the agency.

With respect to the local airline, no further capital transfer has been budget for Air Malta as the government expects private investors to take a stake in the company this year.

Fitch maintains a favourable outlook on the future of Malta’s deficit and believes that it will remain stable in 2018 as higher absorption of EU funds enables lower public investment.

Government-guaranteed liabilities remain amongst the highest in the European Union at 14.8% of GDP at the end of 3Q16, although they are set to decrease to 11.9% of GDP at end-2017, when the temporary guarantee granted to ElectroGas for the construction of a new power station expires. The rating agency also noted that most guarantees relate to profitable companies, including the utility company Enemalta, Freeport Group Corporation and Malta Industrial Parks.

Banking

Fitch has also reviewed the Maltese banking sector which continues to register substantial growth. “Malta's banking sector remains profitable, liquid and well capitalised, albeit highly concentrated, with core banks representing 219.5% of GDP as of end-September 2016. Asset quality has improved with non-performing loans decreasing to 5.6% of total loans at end-September 2016, and we expect it to improve further,” states the agency.

The agency assumes that the government would only be predisposed towards supporting the core domestic banks that are systematically important, particularly the Bank of Valletta (109% of the GDP at-end 2016) while on the other hand, HSBC Bank Malta (81% of GDP) is more likely to be supported from its parent company.

Finch rating agency propounds that a sharp correction in the housing market constitutes the main domestic risk to the sector through mortgage lending and real estate collateral. However, the rise in house prices has moderated and the pace of mortgage lending decreased to 6.2% as of end-September 2016 from 11% a year earlier.

The rating agency has also commented on future developments which could individually or collectively result in positive rating. These could include:

• A longer track record of consolidating the public finances that leads to a lower government debt/GDP ratio.
• A significant decline in contingent liabilities or a low likelihood that these contingent liabilities materialise.
• Progress in addressing key weaknesses in the business environment